How to Go for the Long Ball With Stocks

Hitting a home run with investing requires patience and common sense.

Today will be the last piece in my personal Real Money salute to Major League Baseball's Opening Day. After today, I will not write about baseball again until at least next week.

Since it is the last of the series and we are going into the weekend, I will focus on what can be the most exciting part of the game and of investing. Watching Giancarlo Stanton hit one of those towering drives that should probably have obtained an FAA permit before launching is almost as exciting as owning a stock that goes up three, four, even five times or more from your purchase price. Home runs can change a game instantly, and a few home runs over your lifetime can have a significant impact on your investing results.

If you go up to the plate looking to hit one out every at-bat, you will have a lot of strikeouts. It works the same in investing. Hitting a long ball usually involves buying a turnaround or hyper-growth stock, and both carry significant risks. You will have a lot of stocks that just do not work out and you have to hope the ones that do work offset the losers. That's not necessarily a bad thing. The all-time strikeout leaders include Reggie Jackson, Willie Stargell and Mickey Mantle. In 2009, Mark Reynolds led the majors in strikeouts. He also hit 44 home runs and drove in 102 runs. In home run investing, if you are right over a five-year period, about half the time you will beat the market.

The keys to home-run stock picking are patience and common sense. Home runs are hit over several years, not a few weeks. I prefer turnarounds in my search for home runs and I approach them like a private equity investor. I try to find those that I think can survive until business improves enough to drive the stock price higher by multiples over five years or so. I only devote a small portion of my portfolio to home-run stocks, but younger investors should probably have more potential long-ball stocks in the mix. I like to use Value Line's highest three- to five-year appreciation list that appears every week and then apply a liberal dose of common sense to find my home-run picks.

Among my favorites right now is Daktronics (DAKT). This is the leading supplier of scoreboards, stadium displays and other electronic displays. Business has been weak as a result of the timing of some larger orders, a slowdown in international orders and seasonal weakness in the high school and collegiate markets. Looking at a longer outlook, the use of electronic displays and billboards is growing and should continue to do so. Daktronics is positioned to see extraordinary long-term growth and it is financially strong enough to weather any short-term storms in the marketplace. Value Line sees the stock doubling at worst and more than tripling at best over the next three to five years. I agree and own the stock in my wife's "Don't lose my money because I can kill you in your sleep" retirement portfolio.

Some of the homebuilders are shaping up to be potential home run stocks as well. The homebuilding market has not recovered as quickly as many hoped and earnings have not met the optimistic projections we saw a few years ago. The jobs market is not wonderful, with mostly lower-paying jobs being created, and millennials are reluctant to purchase single-family homes. As a result, the price of many homebuilders may offer tremendous upside for patient investors. Value Line estimates that shares of Beazer Homes (BZH) can easily double over the three- to five-year period and if conditions improve markedly during this time frame, the stock could quadruple from the current price.

Hovnanian Homes (HOV) has the highest appreciation potential, but high leverage and weak market conditions are keeping the stock price down. The company is exiting certain markets that have not performed well and is focusing on deleveraging the balance sheet. This is a Chris Davis stock, in my eyes. If it succeeds, it's a moonshot and could even be a 10-bagger. If it doesn't, it's a strikeout. The company has been around since 1959 and has dealt with difficult markets before, so I like its chances. I would not buy a lot, but it is worth owning a little bit. If it recovers, you make a lot and if it can't deleverage quickly enough, you lose a little.

Home runs are one of the most exciting parts of baseball and can be pretty exciting in investing as well. Just use common sense and a long time frame and you can use home-run stocks to improve your long-term rates of return.

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At the time of publication, Melvin was long DAKT and HOV, although positions may change at any time.

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